Future Fund: the right support for innovative businesses?

 

On the 20th May 2020, another Covid-19 rescue package has been introduced by the government in the UK; the Coronavirus Future Fund is aimed at innovative companies struggling with financial difficulties amidst the economic downturn provoked by the lockdown. 

The fund will be open for applications until the end of September 2020 and supports companies based in the areas of technology, life sciences and the creative industries. 

The government made an initial £250 million available. However, this can be expanded if they deem necessary. 

The fund, managed by the British Business Bank (BBB) will issue convertible loans between £125,000 to £5 million with private investors having to match the amount. These can be venture capitalist (VC) funds, angel investors or regional backed investors. The convertible loan can be repaid or converted into equity at the next funding round or after three years.

The package comes to the rescue of businesses that rely on equity investment and are therefore not qualified to access the Coronavirus Business Interruption Scheme (CBILS) or Bounce Back Loan Scheme (BBLS) both relying on pre-revenue or pre-profit. It comes after an open letter by Deliveroo and other tech giants calling for the help of the government and is therefore aimed at fast-growing UK tech firms. 

The Future Fund seems to have been greatly needed. Sky News reported that it has received applications for a staggering £450 million worth of loans on its first day of operations.

Furthermore, we are delighted to see that the government has realised how important the presence of women is in the tech scene. Investors providing the necessary funding match will be encouraged to sign the Investing in Women Code, and help encourage female entrepreneurs to access the fund.

The scheme, however, was not welcomed by everyone. 

Criticism was quick to pour in. The requirements favour investment from VCs who have an existing, lower risk portfolio. Many start-ups were afraid of missing out, plus there is the risk that cash desperate start-ups may accept bad deals from VCs.

Private individuals make up half of the funding given to startups based in the UK, whereas just 17% of funding derives from VC and private equity funds, even though those will be the main co-investors aimed at in the Future Fund.

Furthermore, the scheme is not adaptable to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Both provide start-ups with tax relief to encourage funding. The start-ups using this funding method will therefore not be eligible for VCs to match funds.

It is now known that the government has listened to these concerns and are planning to amend the rules of the EIS to prevent investors from missing out on previous investment relief.

Another possible future amendment will be accepting start-ups with a non-UK-based parent company, and include those backed by US accelerator programmes.

It was assumed that there would be teething problems at the beginning, similar to what we have seen with current schemes whipped up by the government for small businesses on short notice, and it is yet to be seen how and if the government will change the scheme accordingly to support the businesses who are the backbone of the UK economy.

Future Fund application requirements

  • Your business has to be UK-incorporated, and only the parent company is eligible.
  • None of its shares is being traded.
  • Your business has to be incorporated on or before the 31st of December 2019.
  • Half or more of your business’ revenues come from the UK, as well as half of its employees.
  • The business has raised at least £250,000 in equity investment from third-party investors in the last five years.

We would welcome any feedback, questions and clarifications. If you are a small business who would like to tell us about your experiences, or a financial institution, government body or policy maker who would like to collaborate with us, then please email Isabelle at isabelle@fractal-labs.com.